Bonds: Total Market

(New York)

For several months there has been an ongoing worry about the safety of fixed income ETFs. FINSUM has run several pieces on the topic, but yesterday Carl Icahn and BlackRock CEO Larry Fink squared off at an investor conference discussing the safety of fixed income ETFs. Icahn, and other managers like Bill Gross, argue that fixed income ETFs could see major losses if investors all head for the exits at the same time. This is because the underlying bonds held by ETFs are often much less liquid than the ETFs themselves. However, Larry Fink argues the opposite, saying ETFs add to market liquidity because “buyers and sellers of ETFs interact with each other without affecting the underlying basket of assets” (WSJ). Most commentators, however, seem to agree with Icahn, with one cited in the story as saying “The reality is that the ETFs are really only as liquid as their underlying assets”. One of BlackRock’s fixed income ETFs, the iShares iBoxx High Yield Corporate Bond ETF, trades more than 20,000 times per day, yet each of its top ten bonds only trades an average of 13 times per day.

FINSUM: Who would you trust, the provider of the ETFs, which is making tons on money from them, or an impartial observer? Fixed income ETFS do seem to have a “liquidity illusion” which could hammer investors in a mass exit, such as one caused by an interest rate hike (ring any bells?).

Source: Wall Street Journal


To be clear, Greece and the EU are apparently proceeding with their agreed bailout, with EU finance ministers agreeing to give bridge financing to Greece in the immediate term. However, yesterday German finance minister Wolfgang Schauble brought Grexit back to the table, saying before the German parliament that he thought a Grexit might be the best solution for the country. He is still officially supporting the bailout, but has serious reservations about it. The comments eerily echo those of Alex Tsipras, who said to Greece’s parliament that he did not believe in the agreement. The idea of a Grexit is still swirling around in German political circles.

FINSUM: There is a very odd situation occurring here. Almost no one, including Greece and Germany, believes in the bailout, but the process is still going ahead. The fear of the unknown is terrifyingly strong.

Source: Financial Times

(New York)

Four months ago the Dollar’s strong rally sputtered out. Since then the currency has weakened, but recently, the bull run is back and the Dollar is close to regaining all its lost ground. The Dollar is close to reaching the previous 12-year high it hit four months ago, and continued bullishness from the Fed seems to be stoking the trend. On the back of Janet Yellen’s hawkish comments yesterday, the Dollar jumped 0.5% against a basket of currencies, and is now just 1.4% off its March peak. However, according to this piece, some investors and traders say the bull case is not as strong this time around, as higher rates are already priced in and economic data looks patchy. Ironically, the US’ relatively stronger economic position on the global stage means that its currency could strengthen, which would potentially have the perverse effect of undermining its strength, hurting exports and earnings.

FINSUM: Our view is that Dollar bullishness might be overplayed. The Fed is trying to walk rates up so as to subdue turmoil when it actually does hike, however, we believe that event is much further off than they are saying. All of this could mean the Dollar falters from current levels.

Source: Wall Street Journal

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